Mongolia Presidential Election Maintains Divide Between Presidency and Parliament

The people of Mongolia have just completed the election of the President of Mongolia. Battulga Khaltmaa, of the Democratic Party, is the victor. Mr. Khaltmaa follows Ts. Elbegdorj, also of the Democratic Party in serving as President. This will continue the previous dynamic of a Democratic Party President serving concurrently with a parliament dominated by the Mongolian People’s Party (MPP).

Mr. Khaltmaa achieved his win with 50.6% of votes cast, with a voter turn-out estimated at 60%. The MPP candidate received 41.2% of the vote, while 8.2% of ballots were returned in protest with no selection, a practice expressly allowed by the Election Law of 2015.

The MPP continues to hold a supermajority in parliament. Therefore, they will retain the capability to override any potential veto by Mr. Khaltmaa of proposed legislation. Still, his presence at the top is expected to force some concessions on the part of the parliament. Mr. Khaltmaa will be primarily responsible for foreign policy, and negotiations of treaties with foreign governments.

During the campaign, Mr. Khaltmaa advocated for state involvement in the economy, and management of natural resources. He has framed his pending presidency as a necessary balance against the MPP dominated parliament. It is expected that a period of adjustment will follow the election in which the parliament and Mr. Khaltmaa learn to work together and set boundaries.

Mr. Khaltmaa is called a Nationalist by Bloomberg. His campaign has promised to increase public access to wealth from Mongolia’s large resource mining projects. He has also promised to reduce trade imbalances Mongolia has with Russia China, a task which may be easier said than done. Even so, the rhetoric has not been overly hostile to foreign investment and the election is not expected to derail Mongolia’s recent efforts to revitalize its mining boom, or efforts to diversify its economy in the agricultural sector.

Mongolia’s Economic Diversification

Strategically located between Russia and China, Mongolia provides rare opportunities for savvy business leaders and investors to start new businesses and expand existing ones. In recent years, Mongolia has suffered economic hardship, as can be seen from the stark drop in GDP growth over the past few years.

As a consequence, the country has embraced economic evolution. Political and business leaders have been forced to seek ways to fuel the economy, not only from mining which was the backbone of Mongolia’s economy for many years, but also from other sectors such as agriculture, renewable energy and tourism. At the same time, a global wave of technology and entrepreneurship have impacted the way Mongolians think and do business, spurring bold initiatives and a reaching out to the international community.

According to the World Bank, while livestock provides subsistence, income, and wealth for nearly half of Mongolia’s population, only 7 % of exports consist of raw livestock materials and primary processed products. This is in stark contrast with statistics for the mining sector, which only employs 5% of the workforce but has produced nearly 90% of Mongolia’s exports since 2000. This imbalance has spurred the Mongolian government to initiate policies and programs that support export-oriented enterprises outside the mining sector.

However, small and medium sized enterprises, which make up more than 80 percent of registered businesses in Mongolia, lack the knowledge, skills, capital and networks to effectively develop and distribute products that can compete in international markets. Therefore, foreign talent, expertise, capital and connections and investment, are well sought after in the country.

In order to decrease the economic vulnerability and meet the needs of the majority of Mongolian society who are dependent on non-mining, agrarian sectors, Mongolian government has been obliged to diversify Mongolia’s economy. In doing so, in addition to export-oriented support policies and programs, Mongolian government has introduced various programs and policies supporting import substitution.

In addition to macro-economic motivations, a strong societal need for food security has led to the opening of a large variety of food factories. Many of them have been formed in partnership with foreign companies and experts who have the sophisticated technical skills to complement their Mongolian partners’ local knowledge.

In this country of vast territory, patriotic people and thirst for advanced technologies and international connections, savvy investors and business people will discover many opportunities.

Bank of Korea Assisting with Modernization of Mongolia’s Foreign Exchange Policy

The Bank of Mongolia, signed a cooperation agreement on June 21, 2017 with the Bank of Korea. The agreement solidifies plans by both organizations to cooperation regarding development of a comprehensive strategy for development of the foreign exchange market in Mongolia.

The Bank of Korea has been conducting a study on Mongolia’s foreign exchange market. The results of the study are expected to have an important impact on development of foreign exchange regulations and growth of the foreign exchange market in Mongolia.

Major complaints about the current state of the foreign exchange market in Mongolia include the lack of transparency in the process and inefficient operations. The study will draw on the Bank of Korea’s past experience in managing foreign exchange issues in Korea to set out a road map for Mongolia.

The plan is expected to help stabilize the exchange rate of the Mongolian Tugrug, which will facilitate a better environment for foreign investment and domestic economic growth.

Renewable Energy Program Means New Opportunity for Mongolian Economy

According to The World Bank, a new renewable energy project is to be launched in Mongolia, utilizing over $50 million in loans and grants from international organizations. The project is a part of the World Bank’s efforts to assist Mongolia’s long term path of sustainable development.

Playing off the government of Mongolia’s plans to produce 30% of the country’s energy via renewable sources by the year 2030, the new project will focus on providing financing for renewable energy investments in Mongolia.

Mongolia is a vast, open country with abundant solar energy and wind energy potential, waiting to be taken advantage of. One key aspect of the program is the construction of the first large scale solar power plant in Mongolia, designed to supply electricity throughout Mongolia’s western regions.

Another important aspect of the program will be the revamping and renewal of Mongolia’s electricity distribution grid, which currently operates inefficiently resulting gin losses of up to 25% of energy transferred on the network.

Sustainable development and efficient electricity distribution are key to promoting long term economic growth in Mongolia. The new funding will go toward providing new opportunities for businesses and families in Ulaanbaatar, as well as throughout the rural areas of Mongolia. The project will also provide funded needed to attract foreign companies with renewable energy technologies to Mongolia.

Mongolia’s Role in the New Silk Road

When China held its Belt and Road Forum for International Cooperation in Beijing May 14 to 15th, China’s President Xi Jinping welcomed Mongolia’s efforts to help link the European and Asian economies.

China welcomes cooperation with Mongolia in areas of trade and investment, agriculture, industrial growth, and energy development. President Xi suggested that China Belt and Road Initiative complements Mongolia’s own Prairie Road development initiative. Cooperation is also important to promote a China, Mongolia, Russia economic corridor.

President Xi advocated for a study of establishing a Free Trade Zone on the Border wth Mongolia, and increasing economic cooperation between the countries, including cooperation on major mineral industry programs and infrastructure.

Prime Minister Erdenebat of Mongolia indicated cooperation with China is a Priority for Mongolia, and said China’s Belt and Road initiative is important for promoting development in Mongolia. According to Erdenebat, Mongolia may play an important role as a link between Europe and East Asia.

Mongolia is well placed between major powers Russia and China to serve as a conduit for economic and cultural exchange. Mongolia suffers from a lack of population compared to its large southern neighbor, however, Mongolia’s rich mineral resources mean Mongolia will be able to generate foreign interest and income for years to come. With budgetary reform in Mongolia well underway, further integration with China and Russia is one more positive development for the future of the Mongolian economy.

Trading Bitcoin (and other Crypto-Currencies) in Mongolia

Following our recent post on foreign exchange trading in Mongolia, we had several inquiries regarding trade of crypto-currencies, such as Bitcoin. While there are no specific regulations in Mongolia addressing use or trade of crypto-currency, both Foreign Exchange and electronic payment and remittance services are allowed under the current regulatory framework, with only a permit required.

A Bitcoin trading (or mining) operation can be established in Mongolia relatively easily. One will only need to establish a Mongolian corporation. Then application must be made to the Financial Regulatory Commission of Mongolia for the appropriate permit.

Securities Registry Opens Opportunity for Mongolia Business

As we have written about in the past, Mongolia opened an internet based registration system for pledges, in March of this year. In addition to serving as a platform for registration of international pledges for some of the world’s largest financial institutions, the new system has also supported over 10,000 registrations in favor of small and medium sized entities (SME).

The registry, implemented by the Ministry of Justice and Home Affairs, is one part of a major project to reform security backed transactions and financing in Mongolia. Enabled by the newly enacted Law on Tangible and Intangible Movable Property Pledges, the online registration service offers web based filing and public access for security interests on movable collateral in complex financial transactions.

The major benefit of the online platform is the ability of potential financiers to conduct a web-based search on property held by potential partners, to determine if the property offered up for collateral is already subject to a previously existing pledge or other security. This information will have a major impact on the business of lenders and will hopefully make potential lenders more likely to make funds available to a borrower after they are able to confirm there are no other securities on the proposed collateral.

According to The Financial, 38% of the more than 10,000 overall registrations are for equipment, 25% are for livestock, 5.4 percent are receivables, and 1.7% are vehicles. These stats suggest that local farmers have been quick out of the gate to take advantage of the new opportunities opened up by the new registration system and the availability of additional financing to promote development and growth.

Foreign Exchange in Mongolia

Financial Regulatory Commission (the FRC) and Bank of Mongolia (Mongol Bank), which serves as the central bank of Mongolia, are authorized to regulate Foreign Exchange (ForEx) trading within Mongolia. The Law on Currency Settlement is the primary legislative authority as to conduct of ForEx in Mongolia.

The currency market of Mongolia operates on the basis of supply and demand and consists of the currency exchange activities of the authorized banks, exchanges and brokerage companies.

Mongol Bank is permitted to buy currencies and gold bullion from domestic and foreign banks, as well as from business entities, other organizations and from individuals. Mongol Bank’s primary official purpose for such purchases is management of currency and wealth reserves of Mongolia. Mongol Bank may likewise sell foreign currency and gold from its reserves as part of efforts to maintain the general stability of the Tugrug (the currency of Mongolia).

Mongol bank acts to fix the official exchange rate of the Tugrug, and to provide guidance as to the same. These fixed rates are set in relation to currencies which are bought and sold on the currency market by commercial banks on a comparative basis against a stable foreign currency used in foreign commerce by a majority of countries. The rate fixed by Mongol Bank is used in the State budget and for customs purposes.

An increase or decrease in the Tugrug exchange rate by 5 percent or more from the previous day shall be brought to the attention of the Prime Minister of Mongolia. This is only report and the Prime Minister has no authority to personally order or to prevent the Governor of Mongol Bank from increasing or decreasing the Tugrug exchange rate in accordance with market conditions.

Mongol Bank also sets various rules and regulations regarding foreign exchange activities, including as to FX swaps, forward transactions, and Forex auctions.

Commercial banks are able to establish their own exchange rate for using Tugrugs to buy and sell foreign currencies based on market conditions. Likewise the bank sets its own rate of commission.

Upon obtaining a license from Mongol Bank, Mongolian Commercial banks are allowed to facilitate non-cash transactions in foreign currency, buy and sell foreign currency in cash, establish and operation accounts in foreign currency (and pay required interest), provide credit and provide guarantees in foreign currency.

A Non-banking financial company may trade foreign currency after obtaining a license from the FRC.

New Liabilities for those who Advise Mongolia CEOs

Parliament has recently passed a bill to amend the Mongolia Criminal Code. The Amendments will create new liabilities for adviser’s of corporate CEOs, whose actions result in offenses such as money laundering, terrorism, bribery, environmental abuse, actions that threaten the nation’s economic security, or the abuse of state property.

Under previous law, only the CEO his or herself could be held liable in such cases. The amendments will hold those around the CEO, who advised or pressured a certain course of action to also take responsibility.

These changes will apply not only to private corporations, but also to state owned enterprises. It is interesting to note that while the Criminal Code previously contained over 80 items imposing certain legal liabilities on legal entities such as companies, the amended Code now has less than 30.

This is in general expected to make it easier to establish and operate a new company in Mongolia. The intention of the law appears to be to make it easier for companies to do business by providing more free dome of operation, while at the same time increasing liability for offenses at the top levels.

MONSTAT Improves Mongolia’s Data and Statistics Capability

After the financial crisis in 2008 and a series of harsh winters, Mongolia took a few years to recover. As part of the recovery, the government set out a wide reaching development strategy, and setting 6 development goals. The government quickly realized that implementation of its strategy would relied heavily on up to date data and statistics. It recognized that Mongolia needed to improve and modernize its internal statistic generation and analytical capabilities in order to effectively implement its new strategic development plan. Mongolia’s old state statistics system was oriented to service the old state lead planned economy from years past. It required a major reorientation to address the needs of the emerging market economy.

The government of Mongolia approached the World Bank for assistance in implementing a new statistics system under a reorganized National Statistical Office (NSO). The World Bank worked with the government to develop the Strengthening of the National Statistics System of Mongolia (MONSTAT) project, designed to generate and distribute, meaningful, accurate and current statistics data, to promote evidence based law making in support of the government’s strategic development agenda.

The first step was to improve institutional, regulatory and policy framework for statistics collection, as well as to put in place higher standards for statistics collection and recording. Personnel knowledge and skill also required improvement, particularly as to survey techniques and data collection methodology. New technology was acquired and implemented to bring operations into the information age. The project introduced data management and quality standards of the EU.

As a result of the efforts of MONSTAT, use reliability and user satisfaction regarding statistics generated by NSO has increased. NSO has explored and implemented new ways to make statistics information available to the public and to researchers. NSO has implemented systems to improve inter-agency cooperation in data-collection and sharing.

The MONSTAT project and the improvements to the NSO are positive examples of Mongolia’s continuing development. The project has provided valuable information to a rage of government agencies, NGOs, and international organizations, working collectively to make lives better for Mongolians and to build a positive environment for foreign investment. With these improvements to the NSO, foreign investors are better able to develop business plans which rely on internal Mongolian statistics.